A New Jersey jury has awarded a company nearly $32 million after it sued KPMG for negligence; with interest, the verdict amounts to over $41 million.

The case involved audits of Papel Giftware, a Cranbury, N.J.-based company that Cast Art acquired in December 2000. Cast Art, a company based in Corona, Calif., sued KPMG in 2003 for professional malpractice and negligence for failing to detect financial fraud at Papel before Cast Art bought the company. During the trial, the plaintiffs charged that KPMG partners knew of the fraud being committed by Papel but purposely overlooked it in order to assist the chairman of Papel's board, who provided significant business to KPMG.

KPMG pointed out in its defense, however, that it had provided going concern audit opinions of Papel for three years, indicating that there were problems with the company, but Cast Art decided to buy Papel anyway. The firm also noted that the judge overseeing the case, Philip Paley, threw out the fraud charge in July.

KPMG plans to appeal the jury verdict. "We do not believe that there is a factual basis for this verdict, and are confident it will be reversed on appeal," said KPMG spokesman Dan Ginsburg. "KPMG had issued going concern audit opinions stating that there was substantial doubt about the company's ability to continue as a going concern on the very financial statements that plaintiffs relied on to purchase Papel Giftware."

One of Cast Art's attorneys, Alan Wasserman of the New Jersey law firm Wilentz Goldman & Spitzer, contended that while KPMG issued going concern audit opinions for Papel for 1996 to 1999, KPMG also confirmed through the audit both that the books and records of Papel met generally accepted accounting principles and that the audit itself was in conformance with generally accepted auditing standards.

"During the auditing process, the audit staff became aware of financial fraud committed by Papel management," he said. "The only thing they did was request the CFO of Papel to promise not to do it again."

He contends that KPMG should have withdrawn from the audit when it found problems with Papel's financial statements. Wasserman said that if KPMG had not issued an audit report of Papel, there would have been no refinancing of Papel's $22 million debt and no merger with Cast Art. He argued that KPMG audit partner John Quinn had written a memo to the audit staff warning them that Papel's CFO was being misleading. He also noted that another KPMG auditor, Frank Casal, testified during depositions and at trial that if the audit team determined the management of a company was untrustworthy, they should immediately withdraw from the audit and not issue an audit report.

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